Interest rate compound: all that owe know

You explain what is and how can calculate it in a simple way.
Call interest rate compound to the interest that is paid, for example, for a deposit or a credit and that to the be liquidated accumulates to the capital (capitalization of the interest), so in the next interest payment, the interest previous is part of the capital or base of the calculation of the new interest.

Calculation on the basis of an interest rate compound

Split of this example: if in bank account have 10,000€ and these us bring 5% of interests (to pay annually), after 5 years not have the€12,500 that owe since, to the have deposited what was obtained annually in the same account, the calculation carries out on the basis of a new total and not to the amount initial (after 5 years have 12,762€).

This result obtains of this formula: 

Final capital = C0 x (1+Ti) ^t

In her, and for understand it better:

  • CO: is the principal (the€10,000).
  • You: is the Interest rate yearly (5% or 5/100).
  • t: is the time that hard the investment (the 5 years).

If the apply to the example:

12,762 = 10,000 x (1 + 5/100) ^ 5

Support the interest rate compound to save

The application of this formula us allows know, in advance, the money with which be able to tell at the end of every year (and after the step of the 5, in the event of the example). The objective? Conscious being of the amount that go to be able to use (in some cases) or withdraw (in other), fact that us support moreover to fulfill our objectives of saving (and pre-saving) to the have knowledge of the total amount that be able to have when finishes the term.